CIT Vs ULTRA TECH CEMENT LTD: BOMBAY HIGH COURT (Dated: February 14, 2017)
Income Tax - Sections 14A & rule 8D
Keywords: exempt income - recording of satisfaction - disallowance & interest
The assessee is a cement manufacturing company. In its Return of Income for A.Y. 2008-09, it had on its own disallowed an expenditure of Rs.50,15,284/- u/s 14A i.e. expenditure incurred to earn exempt income. However, AO after holding that he was not satisfied with the correctness of the disallowance of expenditure made by the assessee applied Rule 8D of the Rules and determined a further the disallowance of Rs.4.03 crores. Therefore, the disallowance in the aggregate was Rs.4.53 crores u/s 14A in the assessment order. On appeal, CIT(A) upheld the order of AO holding that AO had recorded his nonsatisfaction with the disallowance made by assessee u/s 14A. Thus, according to CIT(A), AO had rightly applied Rule 8D of the Rules to disallow the expenditure in the aggregate of Rs.4.53 crores u/s 14A. On further appeal, Tribunal restored the issue so far as disallowance of interest was concerned to AO to determine the extent to which the investments in tax free units were made out of borrowed funds or out of its own funds, to AO in the subject AY.
On appeal, the High Court held that,
Whether in order to make disallowance u/s 14A r.w.r 8D, AO should record reasons to show fallacies in the computation of disallowance made by the assessee - YES: HC
++ we further note that the nonsatisfaction of AO with regard to the disallowance of expenditure done by assessee has to be an objective satisfaction which entails recording of reasons as held by this Court in Godrej and Boyce. No fault can be found with the impugned order of the Tribunal holding that AO should show fallacies in the computation of disallowance done by the respondent assessee. Thus, there is no reason to discard the disallowance done by assessee. Nevertheless, the impugned order of the Tribunal has restored the issue of disallowance of interest to the AO to determine the extent of its tax free investments out of own funds and out of borrowed funds. So far as the claim with regard to the disallowance made in respect of the other expenditure (other than interest which has been restored to AO to find out the source of funds in the investment made), the impugned order has held it to be reasonable and calling for no further disallowance. This finding of the Tribunal is a finding of fact and the same has not been shown to us to be perverse in any manner. In the above view, the question as proposed does not give rise to any substantial question of law.
Revenue's appeal partly admitted
2017-TIOL-339-HC-DEL-IT
ROLLATAINERS LTD Vs CIT: DELHI HIGH COURT (Dated: February 16, 2017)
Income Tax - Sections 41(1) & 80HHC
Keywords: export turnover - clubbing of profits - indirect costs - taxable profits - write back of profits & local sales
The assessee was engaged in the business of manufacturing packaging cartons and packaging machinery. It carries out its activities under various divisions. During the relevant AYs, assessee exported cartons from the packaging division, packaging machines and bought out components from Machine Trading division. In addition to exports, these divisions also had local sales. Assessee claimed deduction u/s 80HHC(3)(a) on division-wise basis, i.e. by taking the total profit of each division which had made exports and thereafter computing the deduction in the same ratio as export turnover of the division bore to the total turnover of that division. The profits and turnover derived from other divisions were not considered while computing deduction u/s 80HHC for a particular division. AO, while framing the assessment order clubbed the profits and turnover of all the divisions and allowed deduction u/s 80HHC by considering the various divisions of the assessee as one business.
It was also engaged in the business of export of trading as well as manufacture of goods. Assessee claimed deduction u/s 80HHC in respect of its trading activity at Rs. 36,27,283. However, in computing the "indirect cost" of trading goods, AO reduced the claim to Rs.17,42,565 thus denying deduction on a sum of Rs.18,84,718. Assessee had also written back Rs.13,80,000 on account of liabilities and miscellaneous balances no longer required, which formed part of taxable profits. The AO excluded 90% of the said amount while calculating the "profits of the business" for the purposes of Section 80HHC.
On appeal, CIT(A) confirmed AO's order as regard computation of deduction allowable u/s 80HHC with respect to profits and total turnover of entire business. With regard to computation of indirect cost in respect of export of trading goods, CIT (A) reversed the AO's order and upheld the calculation adopted by assessee. In relation to exclusion of 90% of amounts written back, CIT(A) held that 90% of such amount could not be reduced for working out profits of the business and accordingly directed AO to recompute admissible deduction u/s 80HHC.
On further appeal, Tribunal held in respect of question as to whether the deduction u/s 80HHC had to be calculated with reference to the profits and turnover of the divisions carrying on export business only, or the entire business of assessee had to be considered, ITAT found in favor of Revenue. In relation to computation of the "indirect costs", ITAT found that the method adopted by AO could not be faulted and therefore, reversed CIT(A)'s order on that issue. As regards the issue of exclusion of amounts written back by assessee, ITAT set aside the order of CIT(A) and confirmed the AO's order.
On appeal, the High Court held that,
Whether in order to compute "indirect costs" in relation to exports made, there should be a nexus or such cost must be "attributable" to the export of trading goods - YES: HC
++ the AO in computing the "indirect costs" has taken into consideration all costs (other than the direct costs) debited to the Profit and Loss account, such as manufacturing costs, which are not related to the export turnover. The ITAT in its decision held that the same was in conformity to the method prescribed under the statute. On this point, SC in Hero Exports v. CIT 2007-TIOL-208-SC-IT, had the occasion to interpret the term "indirect costs" as defined in Explanation (e) to Section 80HHC(3). It is thus clear that Explanation (e) which defines "indirect costs" has to be read in conjunction with sub-section (3)(c)(ii) of Section 80HHC, which provides that the profits shall be reduced by the "direct and indirect costs attributable to export of such trading goods." Since the word "attributable" has been used, it is clear that the indirect costs also must be attributable to the export of such goods; in other words, there must be some nexus that the "indirect costs" have to the export turnover of the assessee. Au contraire, if the term "indirect costs" is interpreted to also include such costs which are not attributable to the export of trading goods, then that would go against the language of the provision, as clarified by SC. That being the position, in view of the declaration of the law in Hero Exports, "indirect costs" computed must have some nexus (or in other words must be "attributable") to the export of trading goods. The decision of the ITAT on this question is therefore reversed;
Whether it is essential that all the "independent incomes" which have no relation to export activity, must be excluded while computing business profits for the purpose of section 80HHC - YES: HC
++ ITAT has held that the written back amount was squarely covered by the expression "any other receipt of similar nature" used in Explanation (baa) of Section 80HHC. Therefore, the question before this Court is with respect to the interpretation of the term "any other receipt of a similar nature" in Explanation (baa). It is trite to say that such a term occurring in a statute must be interpreted ejusdem generis. SC in K. Ravindranathan has taken the view that Explanation (baa) deals with such receipts which although constitute "independent incomes" of the assessee, are incomes that are not relatable to the exports of the assessee. Since Section 80HHC aims to incentivize exports, it is necessary that all incomes of the assessee which are not related to exports be excluded while calculating the profits of business under this section, such that the assessee cannot claim the benefit of this section in respect of "independent incomes" which have no relation to export activity. That being the case, the phrase "any other receipt of a similar nature" must necessarily relate to incomes under the Act which are not attributable to the export activity of the assessee. Once it is established that written back liabilities are considered as profits and gains of business or profession under the Act, for the purposes of Section 80HHC what needs to be seen is whether such profits are relatable to export or would they constitute "independent incomes" which according to K. Ravindranathan would have to be excluded by virtue of Explanation (baa).
++ there is no record of the assessee claiming before the authorities below that the liabilities written back related to or were relatable to its export profits. Thus, the observation that in ACG Associated Capsules squarely applies to the facts of this case. Since such amounts written back would fall within the "profits and gains of business or profession" as computed u/s 41(1), and considering that such amounts do not have any nexus with the export activity of the assessee, keeping the view adopted by K. Ravindranathan in mind, they would have to be excluded from the "profits of the business" under Explanation (baa). In other words, such written back amounts would constitute "independent income" having no relation to the export profits of the assessee. They have to be excluded by virtue of Explanation (baa), to avoid distortion in the computation of export profits u/s 80HHC. This court therefore, finds that on this question, the ITAT's decision does not call for any interference. The third question of law framed is thus answered in favour of the Revenue.
Assessee's appeal partly allowed
2017-TIOL-338-HC-P&H-IT + Story
VISHAL JAIN Vs STATE OF PUNJAB: PUNJAB & HARYANA HIGH COURT (Dated: January 23, 2017)
Income Tax - Writ - Section 272A(1)(c) - Circular No 43 of 2016 & Finance Act, 2016 - Section 199
Keywords: Coercive action - economic offence - 'in relation of prosecution of any offence' - undisclosed income - cash seizure - unconditional release - IPC & PMGKY Scheme - Pradhan Manatri Garib Kalyan Yojana.
The petitioner, an individual, who was travelling by a cab from Delhi was stopped by the police officials in the jurisdiction of the Lalru Police Station in State of Punjab. He was carrying Rs 30,000,00/- in cash. The police detained him and called the Income Tax Department officials which in turn seized the cash. On being questioned the assessee said that the cash amount seized from him was the sale proceeds of old jewellery belonging to him, his wife and mother, which was recently sold by him after demonetization to one Shri Raj Kumar, who was a broker and received new currency notes of denomination of Rs. 2,000/-.
In a writ petition the petitioner pleaded for un-conditional release of the sum; with a further prayer to permit him to have his Advocate present at visible but not audible distance during his interrogation and recording of the statement in connection with the said seizure of amount in this case or any proceedings consequential thereto, much less seeking refrain of any coercive action against him alleging to the aforesaid dispute; with a liberty to avail the remedy under the “Pradhan Mantri Garib Kalyan Yojana, 2016” by depositing the aforesaid amount, tax, surcharge and penalty.
The assessee's counsel further submitted that assessee did not gave any incorrect information or projected the un-disclosed income as any unlawful income. The cash in his custody should be treated as undisclosed income w.e.f.13.12.2016, for, Chapter IX-A had been inserted in the Finance Act, 2016 providing for the “Taxation and Investment regime for Pradhan Mantri Garib Kalyan Yojna, 2016”, whereas on 16.12.2016, the Department of Economic Affairs, Ministry of Finance, notified the scheme that same was said to be in force from 17.12.2016 till 31.03.2017. On the same date, i.e., 16.12.2016, the Department of Revenue, Ministry of Finance also came out for the format of declaration for a person seeking to avail the benefit of Scheme. Subsequent to this CBDT, TPL Division, vide circular no.43 of 2016 issued explanatory notes regarding the said Scheme as per which only persons who were being prosecuted for any offence punishable under the specified legislations were not entitled to avail the benefit of this Scheme.
Having heard the matter, the High Court held that,
Whether mere possession of undisclosed cash is not an offence under IPC and thus, the police have no statutory powers to seize it - YES: HC
++ possession of the un-disclosed income in cash is not as per any of the offences under Indian Penal Code, therefore, the seizure of same cannot be said to be by the police officials. Not disclosing the correct income is undisputed and the offence, if any, is under Income Tax Act. The Income Tax Authorities are within their domain but the police officials cannot exercise the power under the Income Tax Act. Once the petitioner has candidly admitted the factum of having not been tried in any of the provisions of law, i.e., the offence under Section 3 of the Prevention of Money Laundering Act, 2002 etc., ibid. The police officials have rightly not involved the enforcement department and handed over the amount to the Income Tax Department for further enquiry. In such circumstances, this Court finds that action of the respondents-police officials cannot be faulted. The question to be seen is that for possessing un-disclosed income, for cognizable and un-cognizable offence under Indian Penal Code has been registered by the respondents, thus, in my view, action of the respondent-police officials in stopping the petitioner for enquiry, retaining the cash and forwarding to the Income Tax Department cannot be faulted. Thus, the contention of the petitioner of having retained the amount by the police officials on the basis of the statement made by Mr. Yatinder Sharma, is hereby rejected;
Whether legislative intent behind the use of expression 'in relation of prosecution of any offence' in the PMGKY is to exclude a declaration only if chargesheet or complaint is filed for prosecuting a person and not merely when investigations are conducted - YES: HC
++ PMGKY Deposit Scheme - it is evident that a person can avail the remedy of declaration. Last date for submitting the Form 1 as prescribed in the Rules may be made at anytime on or before 31.03.2017. The explanation is in tune of Section 199 (o) of the Finance Act, 2016 as the petitioner has made a categoric statement that he is not involved in any of the offences listed out for excluding certain declarations under the scheme;
++ this court is of the view that the use of the words “in relation of prosecution of any offence” instead of “in relation to investigating for any of the offence” clearly shows legislative intent of provisions would apply only if the chargesheet or complaint is filed for prosecuting any person under any of the provisions of Act and not merely when investigations are going on;
Whether when the Income Tax Department is investigating the case and the petitioner is keen to avail the PMGKY, any coercive action can still be initiated by the Police - NO: HC
++ the prayer of the petitioner of taking any coercive steps appears to be genuine. I am of the view that writ petition can be disposed of with a direction to respondents not to take any coercive action against the petitioner and he may be granted a permission to take the assistance of a lawyer to be present at visible but not audible distance during his interrogation and recording of statement in connection with said seizure in the instant case or any proceedings consequential thereto;
++ however, prayer of the petitioner for directing unconditional return of the seized amount is hereby rejected. In case, the petitioner submits any application to the Income Tax Department, the authorities can look into matter for the purpose of declaration of undisclosed income by availing the remedy under the PMGKY Scheme. They shall consider the same and pass an appropriate order thereon as it enables the Government to earn straightway 50% of the amount, 25% for depositing of the bonds and 25% to be deposited in the account which shall be released only after 04 years. While releasing the amount after 04 years, the Income Tax Authorities can release the same only when there is no outstanding amount due towards them from the petitioner.
Assessee's writ partly allowed
2017-TIOL-149-ITAT-DEL
ACIT Vs LS CABLE INDIA PVT LTD: DELHI ITAT (Dated: February 9, 2017)
Income Tax Act - Section 57(iii)
Keywords – Capital Receipt – Corporate Entity - Foreign Exchange Fluctuation & Pre-Operative Expenses
The assessee company claimed that the expenses on account of audit fees, salaries, staff welfare expenses and bank charges are allowable u/s 57(iii) as such expenditure is essential for maintaining its corporate entity. However, the AO found that the business of the assessee was not operational in the year under consideration, hence such expenditure was not allowable. On appeal, the CIT (A) partly confirmed the addition made by the AO, thus the matter was carried to the Tribunal.
On appeal, the ITAT held that,
Whether pre-operative expenses are allowable u/s 57(iii) - YES: ITAT
Whether the gain on account of fluctuation in foreign exchange is a capital receipt - YES: ITAT
++ the company has to file various statements and returns and has to perform functions to retain its status as a company and has to incur expenses and such expenses shall be allowable as deduction. The order of the CIT (A) is in conformity with the settled position of law and does not warrant any interference;
++ the loans were taken in foreign exchange for construction of plant and the foreign exchange gain was the result of revaluation of loan liability. The assessee did not acquire the plant and the entire gain, due to fluctuation in foreign exchange when the source of funds was for capital expenditure is a capital receipt.
Revenue's appeal dismissed
2017-TIOL-500-CESTAT-MUM + Story
CC Vs MAZAGON DOCKS LTD: MUMBAI CESTAT (Dated: January 17, 2017)
Cus - Committee on Disputes (CoD) held on 21.08.2007 that it was not desirable for the Revenue as well as MDL to litigate the matter - on the face of such clear directions, appeal filed by Revenue needs to be rejected: CESTAT [para 6, 7]
Appeal rejected
2017-TIOL-498-CESTAT-HYD + Story
AMARARAJA POWER SYSTEMS LTD Vs CCE: HYDERABAD CESTAT (Dated: September 12, 2016)
Central Excise - Assessable Value - Transportation charges - Arrangement of transportation by appellant is only for convenience of customer-Railways and requirement under Railways tender and Railways reimburses the charges; Railways inspects the goods at factory and only then they can be dispatched from factory and there is no further inspection at the time of delivery, so the sale is at factory gate and as such freight and transit insurance charges are not includable in assessable value.
Appellant-manufacturer of batteries supplies them to customer-railways - Based on purchase orders, Revenue took view that the sale is FOR destination based at customer's premises and demanded duty on transportation and transit insurance charges - From the perusal of sample letter of advance acceptance and description of contracted supply, it is seen that while appellant does have to arrange for transportation of goods to the stores of Railways, costs thereof are reimbursed by Railways - Arrangement of transportation by appellant is only for convenience of Railways and a requirement under Railways tender - Moreover, from sample inspection certificate, it is clear that only after inspection of the goods by Railways at factory, the goods can be dispatched and no further inspection is done at the time of delivery - Hence, it cannot be said that sale is at place of delivery - Since place of removal is factory gate, in view of the precedents, freight and transit insurance charges are not includable in assessable value - Demand set aside - Appeal allowed. [paras 1, 5, 6, 7, 8, 9]
Appeal allowed
